The current downturn in the cryptocurrency markets itself isn't very surprising. There have been many bubbles before, and there will be at least one more bubble after this. What surprises me about this cycle is how quickly the market has collapsed. Whereas previous cycles fell slowly after the long middle period where prices stalled, this time the bottom fell out in the course of a week. This post will review the consequences of the new market reality.

Bitcoins are holding up well

Perhaps the biggest shock of this cycle is how the price of bitcoins has held up so well compared to that of other coins. In June 2017, when we were deciding whether this pool could be a profitable business and how many people we should hire if it could be. We determined that the average case where the coins would settle was bitcoins at $1574, ETH at $110, and LTC at $30. ETH and LTC have already surpassed the average case decline we had projected, while BTC is holding above twice the projected bottom.

The reason for BTC holding up so well isn't obvious. Almost every other coin is superior to BTC in some way. For example, LTC and BCH are much cheaper to send money with, ETH is used for contracts, and Monero has anonymity.

I don't think that bitcoins will hold up for much longer. I think that the capitulation to $980 is still ahead, and the price after capitulation will be $1500 or so. The BTC network still hasn't reckoned with the lack of a realistic plan to increase its block size. At some point, the lightning network is going to be shown as a technical marvel that works well when people are running nodes, but that it's too difficult for ordinary users and that money transmission regulations will not permit most businesses to run nodes. The Core developers are still pressing on with their effort despite the money transmission regulations.

Right now, growth is being driven by people willing to experiment. Eventually, the lightning network will run out of hobbyists to adopt it and its growth will cease, because normal businesses like us won't touch it due to the legal risks. At that point, people will realize that there is no "Plan B" for Bitcoin, and perhaps that will cause capitulation and force the Core to reevaluate their path forward.

We should reevaluate how coins are valued

Another change in this crash from the previous crashes is the complete lack of news to explain it. During the $32 -> $2 downturn, it was quite possible that nobody would ever adopt cryptocurrencies. During the $266 -> $69 downturn, many believed that Mt. Gox's unreliability and instability would lead to the death of the industry. During the $1160 -> $160 bubble, China banned bitcoins every week. But during the past two weeks, there has been no news of any importance.

In particular, ETH prices are absurd. I really don't understand how people think that ETH is priced anything close to its real value. Gas prices continue to rise and people think it's worth 6% of what it was a year ago? If I were paid in dollars, I would be changing them to ETH as fast as I could right now.

Since these prices don't make sense with what many people and I think are the fundamentals, then we need to reevaluate our views on how coins are valued. It's quite possible that the idea that things like transaction capacity and features don't actually matter.

There was one news article that caught my attention a while back. It proposed that, during 2017, a lot of the buyers into coins came from "ordinary people" who knew very little about cryptocurrencies. These people talked about coins at parties and bought what their friends bought. Someone like me, who spends most of his time at home writing code for this business, who is not married, and who has fewer friends than the average person, would not have been exposed to enough instances to make a connection if it were true that someone talked about bitcoins at every social event. I'd also venture that many of the people discussing bubbles in Internet forums also engage in less socializing than the average person, so reading theories about what happened from them leads to inaccurate conclusions.

During the next bubble, I'm going to more strongly consider social issues rather than technical issues and see whether that increases the accuracy of my predictions.

IPOs of mining manufacturers were too slow

One way to predict that this would not be a quick recovery into another bubble like the first 2013 collapse was to look at the IPOs from the mining manufacturers. Businesses don't issue IPOs when they have plenty of money - why would you give up potential profits to get money now if you don't need it? Instead, executives at the companies were really smart and saw that the writing was on the wall. Their problem was that they moved too slowly to sell their stakes. I don't think that the IPOs will be able to raise sufficient capital at this point and they will probably be cancelled. Bitmain or one of the other big mining manufacturers will likely go out of business.

Mining manufacturing is an interesting business because there is zero demand for your product during times like these. The industry basically resets every few years with new companies. The bitcoin difficulty just fell 15% during the last period, and the market is flooded with the miners that were just shut down. Why would anyone buy a new miner when all these old miners are being given away at any cost?

It doesn't make sense that anyone would ever invest in these IPOs or in the rumored Coinbase IPO. All of these stocks are 100% dependent on the cryptocurrency market recovering. If cryptocurrencies settle at these prices indefinitely, Coinbase will be unable to support its operations and will collapse, so you'll lose a lot more money than if you invested in coins (which have no chance of ever being completely worthless anymore.) If cryptocurrencies increase in value, they will go up by 100-1000x and Coinbase's stock will go up by 5x or 10x. In both cases, buying an IPO in the cryptocurrency world never makes as much sense as buying the coins themselves. Either buy coins or buy stocks in some unrelated industry to diversify.

"Manipulation" is a buzzword people use to explain things they don't like

Whenever prices fall, people start complaining about "manipulation." They experienced a huge drop, so the people selling must have been "manipulating" the market to cause them to lose money. The latest theory is that Bitfinex is not being honest with its Tether reserves. Bitfinex clearly violated the law by serving US customers and not shutting down when it was insolvent, but there isn't any evidence that Tether is going to fail due to fraud.

Note that Tether may fail due to banks discontinuing Tether's accounts, but that is different than fraud where a misrepresentation is being made.

I don't believe that the cryptocurrency markets are "manipulated" like most people think. There are some scams, especially those where people create ICOs and don't deliver a product. I doubt that the SEC will bring any charges against Bitfinex, and most of these complaints about "manipulation" are simply people complaining because they lost money.

Businesses will start to fail

Now I can get to the consequence that I think is the most important to understand in predicting how the next cycle plays out.

One of the reasons that the next bubble is a while away is because there have not yet been a lot of businesses that have failed. One of the unfortunate aspects of cryptocurrency, and one that significantly delays its development, is how the bubble cycle causes good ideas to fail. For example, the ETCDEV team, which contributed to Ethereum Classic development, recently folded due to bankruptcy. While I don't hold much love for people who are willing to overlook something as heinous as the DAO theft, the ETCDEV team did seem like it would be a significant contributor to developing ETC, and that won't happen now.

In fact, it's more likely that honest, ethical businesses will fail during this coming down cycle than scammers and fraudsters. It doesn't cost much to be a scammer - you just register some fake accounts and announce a new project, then disappear with all the money. Operating an honest business is expensive. It will cost us $15,000 just to comply with the 1099-MISC regulations next month. That's why, as prices fall, we should expect disreputable people to start to again outnumber law-abiding citizens in this industry. We can already see that happening as people with criminal records like Craig Wright, Roger Ver, and Charlie Shrem are dominating the conversation more and more.

As prices fall, businesses will need to make a decision. Many of them will decide to "pivot" - which essentially means that the company is shutting down and is creating a new firm in a different industry. This was common in 2015. Remember that the level at which a company should quit working in cryptocurrencies is not determined by whether they are making money, but by whether they are making as much money as they could in another field. Most of the time, companies that "pivot" don't return to whatever they were doing before, because they either find the "pivot" field to be lucrative, in which case it makes sense to keep at it, or they go bankrupt in that field too and close down permanently.

They key issue with these "pivots" and outright bankruptcies is that talent leaves the industry and is permanently gone. It takes at least 6 months for a programmer to join a project and become familiar with a codebase, during which time that person's productivity is significantly reduced. The cost of training a new hire is often as much as that person's salary for an entire year, given that other people in the company need to slow down to train the new person. When people leave a company, they don't just come back if times get better. They get new jobs, with new responsibilities, and that knowledge is lost.

Suppose that there is a company that has created an amazing Ethereum-based marketplace that will eventually gain millions of simultaneous customers. The marketplace reaches completion, but in the downturn the company is forced to shut down until the market turns around again, because all their customers are gone. Even if the owner of the company retains the software and is available and willing to restart when the next bubble begins, years have passed and new employees are needed. It will take 6 months to get all the employees hired, another 3 to get them minimally trained, another 1 to upgrade all the development environments, packages, and tools that became obsolete during the stoppage to get everything up to current standards, and another 2 to redo the website design to do the same thing with different colors and designs because the Internet for some reason changed its mind on what makes "attractive" webpages again.

If the downturn lasts two years, then this project could have been out three years earlier if it weren't for the bubbles. Not only that, but the project's suspension itself contributed to the long duration of the bubble cycle. There would have been more activity in cryptocurrencies if this system had been available.

This effect is why I believe that as prices decline, the length of the upcoming downturn will increase significantly. Over the next weeks and months, we're going to start to hear of promising projects fail, and that's going to reduce the value of coins, cascading into other projects' feasibility, and creating a ripple effect of "pivots" and bankruptcies.

This is why I think that the first 2013 bubble had a much different outcome than the second 2013 bubble. In the first 2013 bubble, prices never collapsed after the long period of stability, and businesses were able to keep moving forward during that time. During the second 2013 bubble, prices collapsed after that period of stability that ended in August 2014, and one can look back at news articles form the day listing failures and "pivots" that occurred in the subsequent months.

If it weren't for bubbles, the industry would be years ahead of where it is now. The smartphone, for example, rose from unknown to market saturation in 10 years. After 10 years, where are cryptocurrencies, which also arose in 2008? About 6 or 7 years behind where they could be, because every bubble requires a reset with new companies, given that most of the work from the previous bubble is wasted.

There will be a next bubble

Finally, there will definitely be a next bubble - of that, I'm 100% certain. If you're not sure of that, then consider a scenario where you live in a world that already uses cryptocurrencies for all transactions. One day, a government decides that it's going to create its own currency, which it will be able to inflate at will, and which will take hundreds of times longer to conduct transactions with.